The depreciation of the pound had had a sizeable effect on UK government bonds, with a sharp increase in bond yields and a steepening of the yield curve by 20 to 35 basis points at the five-year maturity and beyond.

This would result in hikes to the Fed Funds target rate to 3 percent by end-2015 and 5 percent by end-2016 - in turn causing a sharp steepening of the yield curve, financial market volatility, and a spike in spreads over US treasuries for high-yielding assets," Fitch said.

Absent a steepening of the yield curve in 2013, Fitch said it expects margin compression to continue in future quarters, as banks exhaust opportunities to re-price loans, while higher-yielding securities run off.

While an inverted yield curve has proceeded every post-WWII recession, the steepening of the yield curve we've seen over the past 18 months is similar to what happens in anticipation of an economic recovery.

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